COVID-19 Debt and Beyond
The COVID-19 pandemic has undoubtedly led to a significant increase in public debt worldwide. However, according to the Organisation for Economic Co-operation and Development (OECD), this may only be the beginning of a more profound fiscal challenge facing governments over the coming decades.
A Deceleration in Economic Growth
According to the OECD’s long-term scenario, economic growth among its 38 member countries and the Group-of-20 nations will slow down from around 3% currently to 1.5% by 2060. This decrease is expected due to a combination of factors, including:
- Deceleration in large emerging economies: Many emerging markets are facing significant economic challenges, which will impact global growth.
- Demographic change: Changes in population demographics, such as aging populations and declining birth rates, will lead to increased costs for governments in providing public services and benefits.
- Slowing productivity gains: The pace of technological progress and innovation is expected to slow down, leading to reduced economic growth.
Rising Costs and Fiscal Pressure
Governments will face significant fiscal pressure as a result of these trends. In particular:
- Pensions and healthcare costs: With aging populations, the cost of providing pensions and healthcare services will increase substantially.
- Climate change adaptation: The need to adapt to climate change will require significant investments in infrastructure, technology, and other areas.
The Challenge Ahead
To maintain public services and benefits while stabilizing debt in this environment, governments would have to raise revenues by nearly 8% of gross domestic product (GDP) by 2060. In some countries, including France and Japan, the size of the challenge would amount to more than 10% of output.
OECD Recommendations
The OECD suggests that countries should not necessarily rely on raising taxes to meet these challenges. Instead, it recommends:
- Reforms to boost employment rates: Governments can implement policies to increase employment rates and reduce unemployment.
- Raising retirement ages: Ensuring that retirement ages rise by two-thirds of future gains in life expectancy could help alleviate fiscal pressure.
The Potential Impact
If governments adopt these recommendations, the OECD estimates that the projected increase in fiscal pressure could be halved in the median country by 2060. This would provide a more sustainable path for maintaining public services and benefits while stabilizing debt.
Conclusion
While the COVID-19 pandemic has undoubtedly led to significant increases in public debt, the OECD warns that this may only be the beginning of a more profound fiscal challenge facing governments over the coming decades. By adopting reforms to boost employment rates and raise retirement ages, countries can mitigate the impact of these trends and maintain public services and benefits while stabilizing debt.
Sources:
- Bloomberg.com
- Organisation for Economic Co-operation and Development (OECD) policy paper by Yvan Guillemette and David Turner
